Koch v Cato: Why Would A Nonprofit Have Shares?

A blog about business and economics.
March 2 2012 8:43 AM

Koch v Cato: Why Would A Nonprofit Have Shares?

Something that was confusing me about the lawsuit between the Koch Brothers and the Cato Institute that Dave Weigel's excellent backgrounder didn't really explain was how is it that a 501(c)3 nonprofit like the Cato Institute has "shares" for people to be arguing over in the first place? After all, one of the rules of the game is that nobody owns nonprofits. The answer seems to be that Cato is formally organized as a membership institution that just happens to have a very small number of members. A more standard form of 501(c) organization seen in most DC think tanks is that you have no members and the board is a self-perpetuating governance body. But if you think of the "shares" at issue in the Koch/Cato lawsuit as memberships, then you can see why the legal issue arises about whether the late William Niskanen's shares can be inhereted by his wife. If those were shares in a standard for-profit business corporation then of course his widow could inherit his shares.

Incidentally, when I was asking about this on Twitter I noticed that a lot of people out there of the progressive inclination seem slightly confused as to what the proper legal meaning of the word "corporation" is, and I think this may also be driving some confusion about the Citizens United ruling.

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Think about it this way. You, a human being, own things and enter into contractual relationships with other people. But sometimes in life you want something to be owned by an abstract entity. A member of a congregation doesn't want to buy a pew and just place it in a church, she wants to actually donate the pew to the church. Or she wants to donate money to the church so it can buy what it needs. That may involve handing a check over to some specific human being, but the idea is that the money now belongs to the church rather than to the person who received the check. At the Slate offices, the desks and stuff are owned by The Slate Group which is a division of the Washington Post Company, they're not the personal property of David Plotz or Jacob Weisberg. The fact that the Post Company is a for-profit business and your local church isn't makes no difference to the fact that they're both corporations, cooperative enterprises that have been endowed by the state with various legal rights. A corporation can own things, can enter into contracts with people and other corporations, can launch lawsuits and can be named as a defendant in lawsuits. Thus, even a labor union is typically a kind of corporation—in the United States they're organized under section 501(c)5 of the Internal Revenue Code along with agricultural and horticultural organizations.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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